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If you're interested in investing in Chinese stocks, better play Follow the Leader. In other words, hang on every word from China's key political players, as opposed to junior functionaries such as commerce ministers and bankers.

Despite the success of China's experiments in free-market capitalism, the top-cat communists running the show in Beijing can't resist the temptation to engineer the economy. Their tinkering will increase in the next several years, according to Robert Hardy of Geostrat, a business-intelligence service that boasts clients in high places around the globe, including political and intelligence types in Washington, D.C. Pronouncements by Chinese leaders could provide clues to the Chinese stocks best poised to benefit.

The uptick in China's central planning owes to the scheduled overhaul in the country's leadership during the fall meeting of the 18th Communist Party Congress in Beijing. Seven of the nine members on the all-powerful Political Standing Committee of the Politburo will be replaced. During this transition, the leadership wants to assure domestic tranquility, especially since public disgust with official corruption is elevated. A healthy Chinese economy is the balm's essential ingredient.

The leaders are apt to hand-pick companies that Hardy calls "economic champions" to improve life for the proletariat masses. On May 30, China's cabinet publicly designated seven "strategic" industries from which the champions will be selected: energy conservation and environmental protection, information technology, biotechnology, advanced equipment manufacturing, new energy, new materials, and new energy vehicles.

Hardy says the champions are selected as much for political as economic reasons. China's leadership considers trade to be a zero-sum game—part and parcel of its day-to-day confrontations with other countries. If you don't grasp the political dimensions of China's economic and trade policies, you are apt to miss out when investing in shares of Chinese companies, Hardy says. Thus, China is helping domestic companies finance new steel plants when demand worldwide is low.

Hardy claims to have relationships with numerous Chinese business and political leaders. His family traded tobacco in China from the 1880s to the 1930s, and Hardy worked in Hong Kong as a currency trader from 1984 to 1987.

Investors should focus only on Chinese companies that serve the domestic market, he says. Although China hasn't yet been able to transition its economy from an export-based model to one that is driven by home-grown consumer demand, it is likely to move in that direction.

ONE OF THE MOST BEATEN-DOWN Chinese sectors is solar power, says Hardy. He believes it is a splendid long-term play. Not only will some stimulus dollars go toward this "new energy" industry, but so will foreign investment.

Hardy thinks China will be a big supplier to Saudi Arabia, which has announced a solar scheme and the construction of desalinization plants. Saudi Arabia is weighing the political benefits of the deal, not the economic consequences, says Hardy. A relationship with China could win the Saudis a new ally in its dealings with a belligerent Iran, which now counts both China and Russia as significant trading partners.

One danger in China is the possibility of military confrontation with the U.S. in the years ahead, perhaps over spurious Chinese territorial claims to islands off the Philippines and Japan. Hardy thinks China eventually will begin extracting resources from the disputed territories and dare the world to stop it, which could trigger a naval confrontation.

"In 5,000 years, China has never backed off a territorial claim," he says.

Clarification: In last week's column I wrote that the Securities and Exchange Commission was instituting circuit breakers for stocks. In fact, the SEC is recalibrating circuit breakers that have been in place since 1989.